Asian factory activity expands thanks to global AI boom

In September, factory activity across Asia expanded due to the global AI boom, according to private surveys. Policymakers are relieved by this positive trend, which counters concerns about persistent cost pressures stemming from the US-Israeli war on Iran. Energy price increases have cast a shadow on the global economic outlook. However, Japan, South Korea, and Taiwan, major export powerhouses, experienced growth in manufacturing activity fueled by robust demand for chips and AI-related goods.

China's factory activity also expanded in September, as easing weather disruptions allowed factories to resume operations. South Korea saw the biggest increase in nine-and-a-half months, driven by a surge in export demand at the fastest pace in 15-1/2 years. New orders and production growth both hit their highest levels in five-and-a-half years. Usamah Bhatti, an economist at S&P Global Market Intelligence, attributed the expansions to the combined strength of the semiconductor and automotive sectors.

South Korea's Purchasing Managers' Index (PMI) rose to 53.9 in September, up from 52.3 in August, marking the highest level since May. The index remained above 50, indicating expansion, for the 10th consecutive month. Taiwan's PMI also climbed to 56.7 in September, up from 54.7 in August, while Japan's PMI fell to 54.1 from 54.9 in August, marking the weakest pace of expansion in six months.

Despite the slowdown, strong overseas demand helped maintain new export orders for a ninth consecutive month due to robust demand in Asia and improved sales to the US. However, cost pressures persisted, with firms raising selling prices at one of the sharpest rates since late 2022, according to the Japan PMI survey. Factory activity varied across other Asian economies, with Indonesia and Vietnam seeing expansion, while the Philippines and Malaysia contracted.